In the lower-for-longer yield environment, fixed-income investors may turn to real estate investment trusts and sector-related ETFs to meet their needs.
According to EPFR Global data, real-estate mutual funds that are big buyers of REITs attracted $11 billion in 2019 and an additional $1 billion over the first three weeks of January, the Wall Street Journal reports.
“We have a maximum overweight to REITs,” MFS Investment Management strategist Rob Almeida, told the WSJ, revealing that approximately one-quarter of their $4 billion mutual fund is in REIT stocks.
MFS fund manager Rick Gable pointed out that REITs have delivered an average dividend yield of 3% to 4%, along with any profits from changes in their stock prices. Furthermore, in a low-interest rate environment, these companies can increase the value of the properties they own by attracting fixed-income investors who are getting paid less in the bond market.
“There are a lot of investors who are looking for income in the equity market,” Matt Jiannino, head of quantitative equity product management at Vanguard Group, told the WSJ. “REITs tend to be very fixed income-like.”
The REITs dividend play may look even better as ongoing risks like the coronavirus raised the demand for safety bets on Treasury bonds and depressed rates even further.
Consequently, REITs have been outperforming in the new year. So far in 2020, the iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) was up 2.6%, Vanguard REIT ETF (NYSEArca: VNQ) added 2.4%, Schwab US REIT ETF (NYSEArca: SCHH) was gained 1.9% and Real Estate Select Sector SPDR Fund (NYSEArca: XLRE) rose 3.0%. In comparison, the S&P 500 Index was 0.5% higher in January.
However, potential investors should keep in mind that REITs are vulnerable to rising interest rates. Almeida, though, argued that this isn’t likely since muted inflation and the ongoing accommodative central bank policies will continue to keep the pressure on rates.
For more information on real estate investment trusts, visit our REITs category.